Google Purchases YouTube for $1.65B

Google announced today that it would acquire YouTube for $1.65 billion in stock compensation. YouTube will continue to operate independently. Google Video will continue to operate separately.

The acquisition combines the largest and fastest-growing video-sharing community online with the largest search engine. YouTube, which was founded in December 2005, serves over 100 million videos per day via its progressive downloading technology. The site has captured 47.07 percent of the online video market, compared to Google's 11.09 percent. Google, meanwhile, holds about 50 percent of search market share, outstripping its closest rival, Yahoo, by about 25 percent.

The acquisition of YouTube gives Google a greater ability to capture more of the online video and social networking advertising market. Buying YouTube may also give Google a competitive edge against News Corp., which owns social networking site MySpace. MySpace currently owns about 20 percent of the video-sharing market, according to Hitwise.

According to Google executives and YouTube's co-founders, Chad Hurley and Steve Chen, the two companies will work together to improve video search and advertising. The specific plans were vague, although there was repeated mention of new systems for audio fingerprinting and metadata search technology, and opportunities to tie videos into search results.

"It's difficult to say what we're going to be tackling first," said Chen.

"The thing that tipped us over was the vision," said Google CEO Eric Schmidt. "[YouTube founders] Chad and Steve remind me very much of Larry and Sergey when I first came to Google, and I say that in a fond way."

Schmidt and Google co-founder Sergey Brin said that beyond culture, Google was enticed by the "20-30 different ways" that Google and YouTube could work together.

"We spend a lot of time working on our two core areas of search and advertising," said Brin. "And when you think about search, when you want an explanation about something, what better way than to actually see it in video?"

When asked why they felt it was necessary to buy YouTube, given that Google has its own video product and video advertising outlets, Schmidt said that YouTube was the "clear winner on the social networking side of video."

Schmidt also said that Google Video would continue to operate normally. "Google Video isn't going away right away or ever, I hope that's clear," said Schmidt.

The two parties brushed off concerns over copyright issues, saying both companies worked with the safe harbor provisions of the DMCA (Digital Millenium Copyright Act) and were responsive to content owners' concerns.

YouTube will continue to maintain its own brand identity and offices in San Bruno, Calif.

The number of Google shares to be issued in the transaction will be determined based on the 30-day average closing price two trading days prior to the completion of the acquisition. Both companies have approved the transaction, which is subject to customary closing conditions and is expected to close in the fourth quarter of 2006.

The all-stock deal was completed as such so that the acquisition would be tax-free for the YouTube shareholders, according to Google Vice President and Counsel David Drummond.